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Citigroup's day of reckoning

Prince out as chairman and CEO as nation's largest bank discloses possible additional subprime mortgage writedowns of up to $11 billion.

November 4 2007: 8:55 PM EST

NEW YORK (CNNMoney.com) -- The meltdown in the housing market hit Citigroup, the nation's No. 1 financial services company, Sunday as it announced the departure of chairman and chief executive Charles Prince and a possible $11 billion in additional subprime writedowns.

"It is my judgment that given the size of the recent losses in our mortgage- backed securities business, the only honorable course for me to take as chief executive officer is to step down," Prince said in a statement issued by Citigroup. "This is what I advised the board."

Charles Prince, who is out as CEO of Citigroup, the nation's No. 1 bank, which he has led since 2003.

Former Treasury Secretary Robert Rubin, a board member and chairman of the executive committee for the nation's largest financial services firm, was named chairman of the board. Sir Win Bischoff, who heads Citigroup (Charts, Fortune 500)'s European unit, will serve as interim CEO until a permanent successor is named.

Citigroup also said it expects a reduction of between $8 billion and $11 billion in the fair value of its exposure to the subprime mortgage market. It said it expects to take a fourth-quarter writedown on the reduction, although the size of the writedown will depend on future market conditions.

The company said the decline in its subprime portfolio, which totals about $55 billion, came as the result of rating agency downgrades and other market developments since the end of September.

Citigroup said it will not cut its dividend and expects to regain its financial balance - meeting its capital ratio targets - by the second quarter of 2008.

The company also said that because of the uncertain nature of market conditions, it doesn't plan to issue any updates about its mortgage situation until fourth-quarter figures are released in January, and that it doesn't plan to issue forecasts for any future reporting periods.

Citigroup said Prince retired from the top positions. The weekend has been rife with talk of his departure as Citigroup's board met to consider his fate.

Prince's is the second high-profile Wall Street departure in the last week. Stanley O'Neal resigned as chairman and CEO of Merrill Lynch (Charts, Fortune 500), the nation's largest brokerage firm, last Tuesday.

The company said a committee will search for a successor as CEO. That committee will consist of Rubin and three other board members: Alcoa Inc. (Charts, Fortune 500) chairman and CEO Alain Belda, TFF Study Group consultant Franklin Thomas and Time Warner Inc. (Charts, Fortune 500) chairman and CEO Richard Parsons. Time Warner is the parent of CNNMoney.com.

"We intend to complete our search for a new CEO as expeditiously as possible, reviewing qualified CEO candidates from outside as well as within our organization," Rubin said in a statement.

Among Rubin's first acts as the new chairman is the creation of a new unit aimed at managing the subprime situation.

"A new unit, the sole focus of which will be on managing the assets related to sub-prime mortgage securities and their resultant exposures, has been established," Rubin said in the Citigroup statement. "This unit will be separate from the other parts of our capital markets and banking business."

Rubin began his career with Goldman Sachs, rising to the position of co-chairman before leaving to join the administration of President Bill Clinton in 1992. After serving two years as the head of Clinton's National Economic Council, Rubin succeeded Lloyd Bentsen as Treasury Secretary in 1995.

He was given much of the credit for the economic growth of the Clinton years, and worked closely with then Federal Reserve Chairman Alan Greenspan.

Rubin left the White House in 1999, and joined Citigroup soon thereafter.

According to Citigroup, Bischoff rose through the ranks of the investment firm Schroders PLC. When it was taken over by Citi's Salomon Smith Barney unit in 2000, Bischoff became head of Citi Europe.

Citi reported a sharp drop in earnings on Oct. 15 that Prince at the time termed "disappointing." The firm had already announced $3 billion in writedowns because of bad investments in securities backed by subprime mortgages, as well as tighter credit market conditions. To date, Citi has reported subprime and trading losses totaling just under $6 billion.

The same day it reported results it joined with rivals JP Morgan Chase (Charts, Fortune 500) and Bank of America (Charts, Fortune 500) to set up a rescue fund to try to buy up to $100 billion in debt in an effort to prevent a fire sale of subprime assets. The U.S. Treasury Department helped facilitate the creation of the fund, popularly referred to as the Wall Street "superfund" after the EPA trust fund designed to clean up toxic waste sites. Citi was seen as leading the effort.

But the fund has been criticized by a wide range of economists, including former Federal Reserve Chairman Alan Greenspan, as a market-distorting structure that could add to, rather than answer, investors' doubts about the securities and end up making the problems worse.

Prince had seemed to have the support of the Citigroup board throughout the market turmoil. But investors were less confident in the firm. Shares have lost nearly one third of their value since the end of May, almost twice the drop seen in the KBW Bank Stock index over that time. The Dow Jones industrial average, of which Citigroup is a component, is down less than 1 percent during the same period.

Prince, 57, was paid just under $26 million in salary, bonus, stock and other benefits, according to Citi's filings. Information about any payments he may receive due to his departure was not immediately available.

He had 1.6 million shares of Citi stock as of Feb. 28, according to company filings, and options for another 1 million shares. If those options were all exercised, his holdings would be worth nearly $100 million based on Friday's closing price.

He had been named CEO of Citi in 2003 and assumed the chairman post in 2006 with the retirement of Sandy Weill, who created Citigroup when the financial services firm he created, Travelers, bought Citibank in 1998.

Prince came to Citi from the Travelers side of the merger. He had joined a predecessor of that firm in 1979 known as Commercial Credit Company, working his way up to executive vice president of the firm by 1996. In 2000, he was named chief administrative officer and by 2001 the chief operating officer of the financial services conglomerate.